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Market Analysis: Dec 01, 2006: Tomm Pfitzenmaier

posted on December 1, 2006

Led by agricultural volume, the CBOT is setting monthly trading records, as well, thanks to contract highs in many nearby contracts. For the week, December wheat futures gained nearly 14 cents. The nearby corn contract advanced more than 11 cents.

Soybeans moved higher because traders are worried that increased corn planting will lead to a shortage of beans. For the week, nearby beans were up three cents. But the December meal contract lost $3.70 per ton.

In the fiber market, the December cotton contract made a nice move up and for the week gained $1.74.

In livestock, the December live cattle contract was off by $2.25. Nearby feeders dropped $2.23. And the December lean hog contract lost $1.08.

In the financials, Comex gold advanced $15.70 per ounce. Nearby crude oil prices jumped $4.21 a barrel. The Euro gained 402 basis points against the dollar. And the CRB Index jumped more than 14 points to close at 323-even.

Here now to lend us his insight on these and other trends is one of our senior market analysts, Tomm Pfitzenmaier. Welcome back.

Market Analysis: Dec 01, 2006: Tomm Pfitzenmaier Pearson: And here now to lend us his insight on these and other trends is one of our senior market analysts, Tomm Pfitzenmaier. And Tomm, I want to talk first about this wheat market which has been an interesting one and really acted as the catalyst for pulling the whole grain sector higher starting about the middle of September. With the prices that we're seeing now in wheat are you a seller?

Pfitzenmaier: Well, pull is higher until about a month ago and when corn and beans sort of unhitched their wagon from the wheat market and corn and beans have continued to go higher and the wheat market has kind of topped out and has been gradually sort of working its way lower I kind of stabilized this week but I think you're in a trading range here now on wheat with a pretty good base there, basis the December contract of $4.85, pretty big resistance up at $5.35 and I think you're going to see wheat bouncing around in that area. I think it went from being a leader to being a follower now of corn and beans and if corn and beans can work higher we might pull wheat back up into those higher levels and then I think it probably needs to be sold again.

Pearson: Okay, so up at the higher end of that trading range, $5.25, $5.35 you're a seller?

Pfitzenmaier: Yep.

Pearson: Alright, let's talk about the corn market which, again, a very interesting week. The July corn contract actually jumped over $4, didn't stay there, a record volume of as we just mentioned a large amount of open interest in Chicago. What is this corn market going to do? Obviously we've got to be getting a little toppy based on some common resistance levels.

Pfitzenmaier: Well, one of the things or the goals or the job of the corn market is to entice corn acres. And like I told somebody this week you're more in danger of hitting the anhydrous tank than getting hit by a deer out in the countryside because, I mean, there's a lot of corn acres that are going to be planted next year and a lot of it is getting prepared this fall for that. So, I don't know that we need to entice farmers to plant corn any more. I think they can do the numbers, they can figure out that it's a lot more profitable to plant corn and they're going to do it in record numbers. The question then becomes are they going to plant six to eight million acres which is probably a bare minimum of enough or are they going to overshoot the market and get upwards of ten million? The one thing that everybody needs to remember about the American farmer is if you give them an incentive and you give them a goal and something to work toward and a hole to fill they fill it and turn it into a hump a lot of times. So, I think we can't underestimate the American farmer's ability to do that. And from everybody you talk to, from the seed people to the fertilizer, all the people associated with corn production tell me that that is in fact going to be done. So, we may very well be up high enough to entice that. As you know we've got plenty of old crop corn, that is why you've kept a carrying charge in the corn market out to July because there's plenty of corn, there's no incentive to take the carry out. The question then becomes is December corn high enough to do its job? You'd have to think with, December '07 corn I'm talking about, up there in that $3.60 to $3.70 range it's probably time to take a piece of that I would think.

Pearson: What about the cash market, Tomm?

Pfitzenmaier: For like nearby corn? I see little reason to be owning a whole, your whole corn crop up at these levels. I mean, these are fabulous corn prices. If you're really worried about it buy yourself a little call, cheap out of the money call and participate in that, you know, the promised land of analysts across the countryside talking about these huge corn numbers. But I think these are good prices to be selling some cash corn.

Pearson: Alright, talk about the 2007, December 2007, big commitment is underway and we've certainly seen that. I've been out in Carney, Nebraska, I was up in St. Paul this week, everywhere I look just what you were saying, there is anhydrous going on, there's people making some, they're making moves now. Should we go out and get some insurance on that December '07 corn contract?

Pfitzenmaier: I think absolutely. I don't see anything wrong with taking 25% to 35% of your projected crop for next year and selling some of it here. Like I said, the other thing that goes on is a lot of the analysts you see take this ethanol number and they project this tremendous demand there but it seems to me that if I paid any attention in economics class when you double the price of corn there will be an effect on demand. You've already seen the egg sets, number of chicks down in the poultry side. You're going to see sow slaughter go up a little bit. You're going to see cows starting to get slaughtered a little bit. Demand will shift, countries that think they need to buy corn to import from us may not need quite as much as they think. So, you know, you can't take current demand project it out into the future and say that's what is going to happen because things will change.

Pearson: Like you say in that rationing, like you say, it's already beginning...

Pfitzenmaier: It's subtle and it takes a while and in the short run there's not much of it takes place. But in the long run adjustments do get made.

Pearson: Alright, and so with that kind of rationing a little bit of insurance, maybe 25%, 30%?

Pfitzenmaier: I don't see how when you've got corn prices as high as most guys I know have sold it in the last 20 years why you wouldn't be taking a piece of that.

Pearson: Let's talk about soybeans. Now, soybeans also have been moving up. Again, a different fundamental situation there, Tomm, there's plenty of soybeans out there.

Pfitzenmaier: Again, in the short run we've got plenty of beans. But what the futures market's job is here is to figure out, again, how many acres of beans are going to get robbed and taken over on the corn side and what is the South American crop going to look like. At this point South America looks pretty good, a little rust in Northern Brazil, not unusual, that's not a big surprise to anybody. Weather wise everything has been fine. A lot of people are projecting about a 3% increase in acreage so they're going to have a slight increase in production. How much are we going to lose? You know, that is why you continue to see beans get pulled up here as the corn does because they are constantly having to sort of play defense. You know, one of the strategies might be to go out and plant everything in corn and go out and buy your beans on the board and plant beans on the board and sit and see what happens with the bean side.

Pearson: That's right, it's the one that everybody is talking about. Would you make bean sales in here?

Pfitzenmaier: I don't know that I'd get in any big hurry on beans. I think beans have a little more go in them and I guess I'm in no big hurry to sell beans.

Pearson: Alright, let's talk about the cotton market, had a good week this week, obviously we could be robbing some cotton acres.

Pfitzenmaier: I think we're going to be robbing cotton acres. Cotton market needs to have some positive things, you know, we've talked for years any time you get under $50 you don't want to get yourself too bearish cotton and that's kind of what happened there. We got down in that $48 range, now we're bouncing up from there. Everybody is sitting here waiting with these sheep cotton prices to see if the Chinese are going to buy. They are the big dominant demand factor in cotton and up to this point they haven't bought a lot. We're anticipating that they're going to. We certainly know they need to and if and when they do then I think you can see cotton move up another three or four dollars from here. But you're right, cotton acreage they're really going to have to play defense against corn also.

Pearson: Alright, let's talk about livestock. That is the other side of this whole corn/soybean deal, the whole other side of the biofuels thing. Cattle prices have been under some pressure. We'll talk about fed cattle first. Are we going to be able to sustain these prices do you think through the winter months?

Pfitzenmaier: Well, I don't know through the winter but I don't think we're going to be able to sustain them over the next 30 to 40 days. I think we've got bigger numbers coming. You've seen the cut out continue to drop. This winter storm was maybe a little bit of interruption but most of that took place in the east and didn't really affect where most of the cattle are being raised. I think the beef movement hasn't been all that great. I just think you're going to continue to see the beef market struggle here.

Pearson: Alright, let's talk about the calf market which is where the most dramatic impacts have been with the higher corn prices. What is your outlook for feeders?

Pfitzenmaier: It's strictly go back and replay what I just said about corn and do the opposite on feeders. I mean, that basically is all the feeder market is an inverse of the corn. If you start to see corn top out here and shift back a little bit then I think the feeder market has probably found a base for itself here. If corn goes up and goes to $4, $4.50, $5 because of huge fund buying then the feeders have got some more down side in them.

Pearson: Obviously we talked earlier in the show about profitability in the hog sector. The corn to hog ratio is pretty out of whack right now for profitability.

Pfitzenmaier: It is, I mean, and there's not a lot you can do about that. I mean, I think there's a little bit of upside in the futures but there's probably a fair amount of down side. Again, the cut outs dropped there too, hams have not been moving well at all, you know, that holiday ham season during Thanksgiving just didn't happen, everybody is kind of crossing their fingers that there is going to be a lot of Christmas ham movement. Ham prices have dropped some and that has been the main component of the cut out dropping. And then the cash hog market has to kind of keep chasing that lower. So, that needs to kind of get straightened out here otherwise the hogs are going to struggle on just net price and then obviously whatever corn does, if it continues to go higher the squeeze is really going to be on them and I think you're going to see, you're going to watch but I think you're going to see that sow slaughter start to pick up a little bit here.

Pearson: Alright, Tomm, for the livestock sector obviously we've got this new built in demand coming with this ethanol sector. What would you recommend for feed coverage this year, next year, going forward what would you recommend producers do? What kind of a strategy?

Pfitzenmaier: I think you've got to go out and get your hands on the physical product, that is probably the primary factor. The basis still isn't all that tight so you can go out and buy the cash product fairly well here. I guess that would be my top priority. The second priority is if you really know you're going to need the cash and you can't buy it buy the futures and then the third one if you're just concerned about, you know, the big blow off, some big blow off top in grains then I think you go out and buy yourself some kind of a call option and don't spend a lot of money for it.

Pearson: Okay, well as usual some great insights. It's one of those exciting times to be in American agriculture.

Pfitzenmaier: It is, it's very exciting. There's lot of opportunities being created here.

Pearson: Alright, let's hope people take advantage of them. That's going to wrap up this edition of Market to Market but if you'd like more information from Tomm on where these markets may be headed and some ideas for your operation visit the Market Plus page at our Market to Market Website. And, of course, remember you can download audio podcasts of our market analysis and our Market Plus segments free at our Website. And be sure to join us again next week when we'll examine the nation's 1.4 billion dollars Christmas tree market. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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